Trade secret and antitrust cases are among the most attractive to litigation funders, and contract disputes provide one of the biggest pools of cases that funders look at, according to an analysis of more than 31,000 cases by LexShares, a litigation funder.
Trade secret cases tend to be attractive because they often come with large damages award potential and they’re typically information-rich, making due diligence easier, the report says.
“When you come across a good trade secrets case, everything seems to align from a funding perspective,” says Allen Yancy, LexShares’ director of investments.
Litigation funders provide money to plaintiffs to pursue lawsuits in exchange for a share of the award.
Smaller companies can find the funding helpful to pursue a lawsuit they otherwise couldn’t afford, and larger companies often like using an outside source of funds so they can keep their cash deployed in more productive ways.
The industry has been around for about 20 years, but it’s grown considerably recently with some $17 billion in outside funds invested in litigation globally last year.
Given the industry’s risk-reward calculation, funders tend to pursue only about 5% of cases, and the LexShares analysis supports this ballpark estimate.
Of the more than 31,000 cases in 2021 it looked at, about 12% federal, and 10% state, were considered cases warranting a deeper look and fewer than 1% federal, and 1% state, were considered excellent fits for funding, suggesting that the percentage of actual funded cases is low.
“The anecdotal 5% figure would seem, if anything, to overestimate the share of cases that funders might deem attractive enough to back,” the report says.
LexShares uses proprietary software to run the cases through an algorithm that assesses them based on 25 performance indicators, with those scoring 9 or above warranting a deeper look and those at 16 or above considered excellent fits for funding.
The lion’s share of cases fall somewhere under a score of 5, supporting the view that most cases wouldn’t be attractive to funders. The company uses the scores as part of its due diligence in determining whether to fund a case.
Critics have said litigation funding leads to plaintiffs pursuing frivolous cases because they’re not paying for it but the data suggest funders are selective and tend to only pursue cases that make sense on the merits.
“A legal finance provider that is funding non-meritorious cases would not be in business for very long,” Gary Barnett, CEO of the International Legal Finance Association, told Legal Dive in an interview. “They’re providing capital on a non-recourse basis over a long period of time. And so they have to be rational actors.”
Trade secret and antitrust cases are concentrated in federal courts, and they tend to score higher on average than other types of cases.
Although trade secrets tend to have high potential damages, winning those damages isn’t easy.
“Often, trade secrets litigation concerns new technology, new products, or new business methods,” says Yancy. “It’s hard to pinpoint a plaintiff’s lost profits because there’s no track record, no history of performance. That’s one of the issues. If the proprietary information involves something novel, it’s difficult to say, ‘I would have made $100 million on this.’”
Even so, of all federal cases, trade secrets tend to score highest in LexShares’ algorithm, with about 60% warranting a deeper look and almost 9% considered an excellent fit. No other type of case comes close to that.
Antitrust cases, which are the second best performing in LexShares’ algorithm, warrant a closer look in 31% of cases and are considered an excellent fit in fewer than 1% of cases.
Other types of cases include trademark or copyright infringement; fraud and fiduciary duty breaches; and torts or personal injury, among others.
Given the volume of commercial disputes, contracts are another big source of cases warranting a closer look by funders, at both the state and federal levels.
“A substantial percentage of the litigation filed nationwide contains a breach of contract claim,” Matthew Oxman, LexShares’ vice president of business development and investments, says in the report.
Even so, few of these cases tend to survive a deeper look by funders because of the challenge of winning awards.
“Liability waivers can kill contract deals, as can broadly written or construed termination clauses,” says Oxman. “These factors might constitute 80% of the ‘deal killers’ that cause us to pass on a potential breach of contract investment opportunity.”
Unlike trade secret and antitrust cases, which concentrate in federal courts, contract disputes appear with equal frequency in state and federal courts.
At the federal level, they comprise the biggest chunk of cases that warrant a deeper look, about 40%, but only a tiny fraction end up being considered an excellent fit. The numbers are almost identical at the state level.
Other factors LexShares’ algorithm looks at include the state the lawsuit is filed in and the size and expertise of the law firm that’s handling the case.
At the federal level, cases filed in New York, California and Utah, which have developed a robust technology sector in recent years, tend to score higher because the courts in those states tend to involve the largest dollar amounts and have highly developed expertise in the areas of dispute.
And at the state level, New York, Florida, Massachusetts, California and New Jersey tend to fare well for reasons similar to the federal courts.
“States with higher value business activity will naturally experience a greater number of business disputes,” the report says.